The Post Keynesian Theory of Money: A Summary and an Eastern European Example

Abstract

The theory of endogenous money has received much attention recently in the post Keynesian literature. A major theme for post Keynesians is that monetary authorities do not have complete control over the supply of credit and hence cannot effectively control aggregate spending: business borrowers and banks together, at least in the short period, determine the amount of credit supplied, and in this sense, the demand for credit creates its own supply. As is pointed out recently by Kregel (1984-85), Lavoie (1984), and Minsky (1980, 1981, 1985), the key to understanding why the supply of credit does not necessarily constrain spending lies in a constellation of political and institutional factors operating on the relationship between large corporations, on the one hand, and commercial banks and the central bank, on the other. The prevailing post Keynesian view is that when firms decide to take on additional investment, given their understanding of market conditions for the sale of additional output, finance for the projects is rarely an operating constraint. Such institutional factors as credit supply agreements (e.g., revolving credits, refinancing credits) which obligate banks to supply credit on demand (Minsky, 1985, p. 15), the trend for banks to augment assets with business debt

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